Magazine Article | July 1, 2001

Virtual Reality Warehouse

Source: Innovative Retail Technologies

By communicating with drop-ship suppliers through a fulfillment hub system instead of VANs (value-added networks), iQVC, the Internet division of QVC, saved 25% in labor costs, cut back orders in half, and reduced vendor order-confirmation time by 20%.

Integrated Solutions For Retailers, July 2001

"Quantities are going fast. Buy now, before they're gone!" repeats a bubbly woman, as she broadcasts live to 79 million homes across the country. The camera zooms in on a diamond earring that shimmers under the studio lights as the hostess' perfectly manicured finger points to the earring's 14K gold post. She speaks live with an excited customer who just made a purchase over the telephone. The stock indicator in the corner of the television screen continuously changes, encouraging viewers to dial before they miss out.

Now a familiar scenario for home shoppers, when QVC debuted in 1986, it jump-started the electronic retailing concept with over $112 million in revenue during its premier year. Today, the $3.5 billion company's total customer file consists of more than 18 million people in four countries, and it gains about 250,000 new customers each month. Once the Internet gained momentum, QVC became an early adopter of an e-commerce strategy, going online with its Web division iQVC ( in 1996. For the second year in a row, Forrester PowerRankings named the $194 million online shopping site the top general merchandiser on the Internet. "iQVC was built with the strategy of offering choice to customers," said Stephen Hamlin, VP of operations at iQVC. "The Internet was really just an evolution for QVC, not a revolution."

Without the time constraints of hourly television programming, the Web division gives customers more options and QVC more opportunities for sales. The 1,680 products seen on TV each week are available for purchase online at anytime, plus the Web site works with 200 additional vendors who only sell through iQVC. This offers a wider breadth of products that are sometimes extensions of on-air features. "Our surveys of new customers have shown that a good percentage of those who see a product on-air will go online to find out more before they buy," Hamlin said. "A customer shopping through both channels will buy 20% more than a customer who uses only one." To QVC the numbers prove that its integrated marketing and technology philosophy works.

E-Commerce Begins With B2B
QVC created an 24-hour electronic retailing television network and was one of the first companies to drive the e-commerce bandwagon, but its electronic dealings are not limited to B2C (business-to-consumer) relationships. Electronic communication plays a key role in iQVC's B2B (business-to-business) dealings as well. When iQVC launched, the company recognized that differences in purchasing activity between the Web and the television channel would require different fulfillment models. The fulfillment methods they chose depended on who shipped the merchandise.

The television channel uses the just-in-time inventory model and operates four warehouses throughout the country. QVC orders a large quantity of each product into its warehouses and features each one on TV until it inevitably sells out. It only sells the quantities it has on-hand and ships the products directly to its customers. iQVC on the other hand, does not operate its own warehouses. Instead, it works with its suppliers in a virtual warehouse environment, also known as drop shipping. Any supplier that works strictly with the Web division ships iQVC's orders for it. The parent company's fulfillment infrastructure would not work as well for iQVC simply due to the nature of Internet surfing and the broad scope of merchandise available on iQVC.

"We could sell thousands of the same product in one day on QVC, but iQVC ships a wider variety of individual orders; it is a whole different dynamic," Hamlin said. Still, for the Web site, operating in a virtual warehouse environment (relying on suppliers to ship its merchandise to iQVC's customers) left room for error.

Hub Shapes Up Operations; VANs Ship Out
iQVC struggled with vendors whose systems did not communicate the same way as iQVC's. "We needed our legacy systems to communicate with suppliers that operated at different technology levels," Hamlin said. Vendors communicated order information through various methods such as EDI (electronic data interchange), XML (extensible markup language), fax, Web forms, or custom file transmissions. The more manual methods, such as fax and telephone, required additional labor costs and time on both ends of the supply chain to ensure accuracy.

For iQVC, the drop-ship fulfillment model relies heavily on EDI, a standard messaging format for exchanging iQVC's order and inventory data with its 200 suppliers. "The problem we faced was that we had limited visibility into our overall supply chain. We were never sure if our vendors picked up the orders, if the orders were accurate, or if the messages were even received," Hamlin said. VANs (value-added networks) transmitted the company's EDI transactions over high-speed connections between iQVC and its suppliers, but the company needed more than that. "Every so often we didn't even know we had a shipping problem until a customer called. Operating on the drop-ship model through a VAN was like communicating through a black hole," he said.

In 1999, CommerceHub (Clifton Park, NY) approached iQVC with its virtual warehouse fulfillment system that could provide iQVC with added visibility throughout its supply chain operations while still maintaining the VAN functionality it needed to operate electronically. Also referred to as a fulfillment net or hub, CommerceHub acts as an invisible translation tool between parties, eliminating the need for iQVC suppliers to adhere to specific technology standards in order to conduct business.

"We now have a system in place that allows us to know when there is a hiccup in the supply chain. This ability to deal with problems immediately saves time and heads off difficulties down the road," Hamlin said. CommerceHub alerts iQVC via e-mail or telephone if a supplier or the e-tailer is not following a predetermined set of business rules. "Once, we sent multiple duplicate orders to a supplier. CommerceHub called us to make us aware of the error and saved the supplier from double shipping many orders to our customers. In a sense they are acting as our VAN, but with more visibility," Hamlin said.

Switching to the fulfillment net model enabled iQVC to save 25% in labor costs associated with processing orders, even as the volume of incoming orders increased. By requiring vendors to submit inventory updates electronically through the hub, back orders have been cut in half, and vendor order confirmation time has been reduced by 20%.

Drop Shipment - An Online Reality
Of iQVC's 200 vendors, 150 of them are communicating through CommerceHub with little technology adjustments to their infrastructures. Hamlin said iQVC plans to convert at least 99% of its suppliers to the fulfillment net system. "If our vendors are not willing to understand that this is the best solution to reach our target customer satisfaction levels, then they probably won't be top on our list to call," Hamlin said. "Broader visibility improves our vendors' service levels. And the better their service levels, the more business we will send their way."

Drop shipment is a common model for e-commerce fulfillment, and analysts predict its popularity will only increase as e-tailers seek the most efficient methods of selling online in a fluctuating economy. According to a 2000 Jupiter Executive Survey, 33% of online retailers intend to use drop-ship vendors in the next year. Jupiter projects that spending on private trading network infrastructure, such as the one CommerceHub provides, will rise sharply from $465 million in 2001 to $37.4 billion in 2005. Virtual warehouses are sparking great interest from a retail perspective, just be sure the fulfillment part of your supply chain is for real - or you and your customers will virtually be out of luck.

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